Tax court says no alimony deduction without formal agreement

On behalf of Stange Law Firm, PC posted in divorce on Friday, June 23, 2017.

In a Missouri divorce settlement, a person might agree to pay alimony to a former spouse. That alimony is usually tax-deductible, but it is important that it be mentioned in the formal divorce agreement. Otherwise, according to the U.S. Tax Court, it is not deductible.

In the case that the Tax Court heard, a man filed for divorce in 2007 and signed an agreement with his wife regarding splitting with her a bonus he had received in 2006. Later, as part of a temporary support agreement, he agreed to pay his wife $3,270 monthly and an additional percentage of income that went above a certain monthly level. The man filed a tax return and claimed this as alimony as well as the portion of the bonus, but the IRS challenged the deduction, and he was ultimately not allowed to take it.

To claim an alimony deduction, it is also necessary for the two people to be living separately. The agreement must not state that the alimony is nontaxable and nondeductible, and the alimony must end on the recipient’s death.

Spousal support is one of several elements that may need to be negotiated in a divorce. People might also need to negotiate child custody, child support and property division. A couple can make an agreement with the assistance of their attorneys that a judge can then make legally binding as long as there are no issues with the agreement such as a violation of state law. Litigation can be an adversarial process rather than a cooperative one, so people might be happier with an agreement reached in this way. In some cases, a couple may reach agreement on some issues but may need to resolve others in court or through mediation.

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